Saturday, December 31, 2011

Let us welcome
the New Year with the “7 Mantras for 2012”, given by Art of Living founder Sri Sri Ravishankar, whom I had the opportunity to meet this year. As it happened, on one of my visits to Bangalore, I thought of presenting him a couple of books and visited his Ashram. I was guided to a large hall where “he would be coming soon to give Darshan”. As I looked around the jam packed hall for a place to sit, he walked in. And as luck would have it, came in the same direction where I was standing. I stepped forward, handed over the two books I had brought (one written by my father and the other by my mother) and gave him a brief introduction. He opened the books, browsed through them and expressed words of appreciation.

Sri Sri Ravishankar, enchanting his devotees during a satsang in Bangalore

So here we go - the 7 Mantras for 2012:

Reflect on your life in relation to the Cosmos. This
will drop the smallness in you & you will be able to live fully.

Remind yourself of the highest goal in Life. You are
not here to grumble / complain. You are here for something bigger.

Serve! Engage yourself in community service to
whatever extent you can.

Have faith & trust that the Divine loves you dearly
& is taking care of you.

It is that time of the year when
one tends to sit back and reflect on the year gone by. Some wishes fulfilled,
some others carried forward to the future. These become resolutions for the
next year.

For me, one of the highlights of
the year gone by was undoubtedly a visit to the Andaman Islands.
A completely chance meeting over the internet with a long lost friend who is
now in Port Blair, and the next week I had landed there, wife and kids in tow,
for a trip he said ‘you will never forget in your life’.

Little did I know how true these
words would be. After all, how much excitement can you pack in a single week?

Friday, December 23, 2011

(This is the concluding part of a
two-part series on property prices. The first part is available here. We
continue from where we left off……)

The Central Government has proposed to set up a Real Estate sector
Regulator ‘to ensure transparency and ensure fair practices’ (see here). The draft Real Estate (Regulation & Development Bill, 2011) proposes
steps such as compulsory registration of projects with the Regulator, deposit
of money collected from home buyers into an Escrow account to avoid diversion,
setting up of an Appellate Authority to address complaints and grievances and
stiff penalties including jail terms for guilty developers. Though the provisions of the Bill are welcome, the Bill will do nothing to
increase supply and bring down prices.

Can the demand come down? In a
country like ours, it seems impossible unless we are talking about a calamity
of such massive proportions that buying property will be the last thing on
anyone’s mind at that time.

My belief is that normal economic
cycles such as an industrial slowdown and high interest rates are just not
enough to cause a sustainable price correction in property prices. What are
needed are sweeping legal reforms with far reaching implications. Some suggestions
that come to mind:

1. Eviction of an uncooperative
tenant needs to be made easier. Then a big chunk of supply (click here) currently locked up empty will come into the market. The ‘stay order’ culture
has to end.

2. Transaction costs are just too
high. Stamp duty, registration, service tax, VAT etc. add to almost 10% of the
cost of the flat for the buyer. What the seller sells for Rs.50 lacs costs the
buyer Rs.55 lacs. Atleast the first flat
for every buyer should be made tax free. Getting a decent place to stay is
a basic necessity of life, a Right as much as Right to Education or Food or Freedom
of Speech.

3.Stamp duty based on the value of
the agreement provides a strong incentive to under report the transaction value. Today, it is almost impossible to complete a transaction without the ‘cash’ component.
This reduces government revenues, which ultimately is compensated by higher
taxes from those who pay. Stamp duty should be made payable based on the area of the flat or the
‘ready reckoner’ rate alone, not on the value of the transaction.

4. Technological solutions that allow mass
production of houses in some kind of CKD (Completely Knocked Down) form
should be promoted. Such technologies exist, such as pre-fabricated buildings
(click here) but need to gain wider acceptability. The governments
have to drive this. This is the only way
supply can be increased dramatically.

It is too much to expect innovative
solutions that genuinely help the people from our present crop of politicians,
who are actually beneficiaries of high property prices. A large chunk of
their legitimate and illegitimate wealth is invested in property. From time to
time, populist announcements such as increase in FSI or redevelopment of old
buildings or mill land are made to pacify a gullible population. But such steps can never change the demand
– supply imbalance and bring down prices. The batch of college students who is
passing out today is not going to ever be able to buy a decent house in Mumbai.

In the long run, this will feed into
social unrest. Social unrest can manifest itself in any manner, not necessarily
into a demand for cheaper homes. One day, a benevolent dictator may decide
that legislative fiat is the only way to alter the situation and dictate ‘all
tenants become owners from tomorrow’ (or something similar). Such instances are
not unknown to history. This may seem
far fetched today, perhaps it is, but we are heading in that direction only.

Until that happens, do not expect
a correction in property prices. Getting a decent accommodation in the city of
work will remain a pipe dream for a major part of the Mumbai’s population. “Affordable
housing” is just a slogan, unless you believe that staying in Boisar and
working in Mumbai is a life.

Sunday, December 18, 2011

The Reserve Bank of India (RBI) seems to have completed one full series
of interest rate hikes with its pronouncements in the latest monetary policy
announced this week (full text here). But despite almost two years of continuous interest rate hikes, industrial
slowdown, scams and what not, and the prognosis of some experts, property
prices have remained stubbornly high. With the talk now turning to when the RBI will reduce rates, you can discount any chance of a price correction. In this two-part article, I pen down some thoughts on Mumbai's property market, based on my observation of the business.

I. Demand:

1. India
has 17% of the world’s population (see here), but just 2.3 % of the world’s land mass (see here). From this, if you reduce the land occupied by its water bodies, deserts,
forests, hills & mountains and agricultural land, the land available for
civil habitation reduces even further. It is only natural that India
should have one of the most expensive land rates in the world. Reports such
as this should not take you by surprise.

2. Considering the population growth rate around 30 years ago, demand today might be growing at 1.1 % p.a. or around 75 lac houses per
year for the country as a whole. (Here I have assumed that a person enters the property market at the age of around 30 and two births create a demand for one house 30 years later)

3. To this, you can add demand caused
due to migration from rural to urban areas, and move from smaller homes to
bigger homes due to rising prosperity, and it is clear that the actual demand growth
is much higher than 1.1 % in cities like Mumbai. The economy just cannot build enough
houses to keep pace with it.

4. Property is also bought as an
investment. People don’t mind buying a flat and simply locking it up. This
absorbs supply without meeting demand of those who want a place to stay.

II. Supply:

You cannot manufacture buildings on an assembly line

1.You just cannot mass produce
houses, as if on an assembly line. Construction is a highly labour-intensive
manual process. My observation is, even for a medium sized project involving a
few buildings, a few hundred apartments which will accommodate a couple of
thousand families, it takes anywhere upto
4 years from the time a project is announced to the time the last of flat
is built and families can move in. By that time, demand would have gone up
manifold! Does the economy have so many project
managers, architects, civil engineers, labourers, plumbers, electricians,
carpenters, etc. who can work cohesively and dramatically increase supply? The
truth is - supply can only increase inch by inch, while demand is increasing by
leaps and bounds. In my opinion, this is the single biggest factor that drives prices in a country like India.

2. A builder may need as many as
fifty different approvals from various government departments to get a project
cleared. At each stage, he either faces red tape or bribery. This either
reduces supply or increases the cost to the ultimate buyer.

3. Builders ‘release’ only a few
flats for sale at a time, usually the least saleable ones first. They have
enough supply of money, formal as well as informal, to enable them to hold on to their inventory. If they
find themselves in trouble, banks restructure loans to protect their own NPAs. So
there is no urgency for the builder to sell. This happened in 2009.

4. There are thousands of flats lying
empty and unused in Mumbai and elsewhere, just because the owners don’t want to risk renting them out. This supply is permanently out of the market.

5.At a systemic level, the
leveraging among buyers is just not high enough to force distress selling due
to a marginal interest rate hikes, such as what we have seen: 3 to 4 per cent increase over a two year period.

In other words, the supply - demand gap is just too much to allow normal economic cycles to induce a price correction. Even the hint of a correction will bring in a hoard of buyers at support the market.